Building a Hedge Fund in Australia with Exposure to the Chinese Economy
In 2010, China was Australia’s main trading partner for goods and services accounting for 19.1% of total trades . This Sinodependance enables on average an Australian balanced superfund to have an exposure of 11% of its net assets to the Chinese economy mostly due to the impact of mining giants such as BHP and Rio Tinto (more than 10% of the All Ordinaries Index).
The first part of this assignment tries to identify companies and selection rules in order to set up a fund (named Super China Exposure) that invests in Australian listed companies with exposure to the Chinese economy. The second part gives details about weights of selected companies, then a pure-play strategy is established and finally the performance of this fund is discussed. portfolio selection
Investment objective
Exposure to the Chinese economy
Super China Exposure is designed to invest in companies that have an exposure to the Chinese economy with an active management strategy.
The Fund is limited to Australian companies which reduces two major risks: political and exchange risks (Super China Exposure currency is AUD since it is designed for the Australian market). In order to minimise political risk and attract concerned investors about China’s political situation Super China Exposure invests in companies that do not have strategic subsidiaries in China (eg: BHP Billiton business in China is reduced to marketing and Mineral exploration ).
According to this constraint, the fund aims at: minimizing the risk/return ratio of stocks with positive alphas beat its benchmark (ASX small cap- refer to Portfolio evaluation section)
Security number and asset mix
In order to limit transaction costs and based on Meir Statman’s research, Super China Exposure fund invests in a moderate number of securities with exposure to the Chinese economy so that the risk/return ratio is minimized. This number is set at 15.
Based on China’s 12th five-year plan release in March 2011 and analyst’s growth
The first part of this assignment tries to identify companies and selection rules in order to set up a fund (named Super China Exposure) that invests in Australian listed companies with exposure to the Chinese economy. The second part gives details about weights of selected companies, then a pure-play strategy is established and finally the performance of this fund is discussed. portfolio selection
Investment objective
Exposure to the Chinese economy
Super China Exposure is designed to invest in companies that have an exposure to the Chinese economy with an active management strategy.
The Fund is limited to Australian companies which reduces two major risks: political and exchange risks (Super China Exposure currency is AUD since it is designed for the Australian market). In order to minimise political risk and attract concerned investors about China’s political situation Super China Exposure invests in companies that do not have strategic subsidiaries in China (eg: BHP Billiton business in China is reduced to marketing and Mineral exploration ).
According to this constraint, the fund aims at: minimizing the risk/return ratio of stocks with positive alphas beat its benchmark (ASX small cap- refer to Portfolio evaluation section)
Security number and asset mix
In order to limit transaction costs and based on Meir Statman’s research, Super China Exposure fund invests in a moderate number of securities with exposure to the Chinese economy so that the risk/return ratio is minimized. This number is set at 15.
Based on China’s 12th five-year plan release in March 2011 and analyst’s growth
References: Australian government, department of Foreign Affairs and Trade (2010), composition of Trade report, from http://www.dfat.gov.au/publications/stats-pubs/composition_trade.html The Economist online (28 October 2010), Sinodependency [Electronic version], The Economist, from http://www.economist.com/blogs/dailychart/2010/10/dependence_china James Dunn (21 april 2010), How to tame your portfolio Dragon [Electronic version],The Australian, from http://www.theaustralian.com.au/business/wealth/how-to-tame-your-portfolio-dragon-china/story-e6frgac6-1225854673743 BHP Billiton (2011), http://www.bhpbilliton.com/home/businesses/Pages/GlobalOperationsMap.aspx Deng Shasha, (5 March 2011), Key targets of China 's 12th five-year plan, English.news.cn, from http://news.xinhuanet.com/english2010/china/2011-03/05/c_13762230.htm Australian Stock exchange (2011), http://www.asx.com.au/asx/research/listedCompanies.do Fin, Chee Seng Cheong and Steinert, justin (Winter 20007), The size effect: Australian Evidence, JASSA, 9-11 Siegel, J. (14 june 2006), The Noisy Market Hypothesis, Wall Street Journal, p. A.14 Siegel, M. (1 june 2011), Australia 's Mining Boom Is Pied Piper for Workers, The International Herald Tribune retrieved from http://www.nytimes.com/2011/06/01/business/global/01ozecon.html